This Commodity is Once Again Set Up for a Large Bounce

It’s time to take advantage of the beaten-down natural gas sector.

The last time natural gas was this oversold, it rallied 40% in just one month.

We might not see similar returns this time, but natural gas is once again set up for a large bounce.

And here’s how you can take advantage today…

First, let’s take a look at the one-year chart of the price of natural gas…

As you can see, the price of natural gas suffered a steep decline in early December. It took only three weeks for the price to fall from more than $2.30 per million British thermal units (MMBtu) to about $1.70 per MMBtu. Then, natural gas rallied all the way back up to $2.50 per MMBtu in mid-January.

[ad#Google Adsense 336×280-IA]Notice, though, that at its December low, the moving average convergence divergence (MACD) indicator had also fallen to a new low.

In other words, the strong downside momentum was confirming the price decline.

So any bounce in the price off of the December low was likely to be short-lived.

And sure enough, the rebound didn’t hold. The price has fallen all the way back down to about $1.62 per MMBtu today.

That’s the lowest price for natural gas in 17 years.

But we’re seeing a different setup in the MACD indicator today. As you can see in the chart, while the price of natural gas has fallen to a new low, the MACD indicator is holding above its December low. The momentum behind this decline is not as strong as it was then.

This sort of “positive divergence” is often an early warning sign of an impending rally.

It’s not a guarantee, of course. There are many factors – inventory levels, East Coast temperature forecasts, etc. – that influence the price of natural gas. Most of those factors are lined up bearish for the price of natural gas right now.

But the market has probably already discounted those factors into the price. That’s why we’ve seen such a strong decline over the past two months.

From a purely technical basis, this looks like a low-risk area to bet on a quick bounce in the price of natural gas. Traders can buy natural gas at about $1.62 per MMBtu today, with an upside target of $2.10, and set a stop at $1.59 to limit the downside risk.

That’s about $0.03 of risk versus $0.48 of potential reward.

For most folks, trading shares of the United States Natural Gas Fund (UNG) is the easiest way to make this trade. UNG is an exchange-traded fund designed to track the price of natural gas.

As you can see, the one-year chart of UNG shows a similar setup today…

Aggressive traders can buy UNG here, with an upside target of about $8, and set a stop at $5.50 to limit the downside risk.

That way, there’s about $0.60 of risk versus $2.10 of potential reward.

It’s a great way to capitalize on the coming bounce in the oversold natural gas sector. You should look to take advantage of that move today.

Best regards and good trading,

Jeff Clark


Source: Growth Stock Wire